Firm Leverage and the Financial Crisis

Altunok, Fatih and Oduncu, Arif (2013): Firm Leverage and the Financial Crisis.

Abstract

The firm growth dynamics is an important topic since the growth performance of firms is the main source of the economic growth in countries. Generally, crises produce a sharp decline in firms’ growth and this leads to a decline in both the level of employment and the income of households. This paper focuses on the role of firm leverage on the growth performance of the firm during the global financial crisis. We investigate whether the firms that experienced a large leverage increase before the global financial crisis has worse growth performance of 2007 to 2009 than the firms that didn’t experience this rise. The findings suggest that the poorer sales growth performance of the firm was related to the firm leverage increase before the global financial crisis. The evidence shows that the correlation between leverage growth and the poorer sales growth performance is robust to firm-level control variables, such as size, age, fixed assets, liquid assets, inventories, profitability, export share and industry-specific factor.

• Item Type: MPRA Paper
• Language: English
• Keywords: Leverage, Growth, Global Financial Crisis, Financial Stability
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Aivazian, Varouj A., Ying Ge, and Jiaping Qiu. "The impact of leverage on firm investment: Canadian evidence." Journal of Corporate Finance 11.1 (2005): 277-291.

Chittenden, Francis, Graham Hall, and Patrick Hutchinson. "Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation." Small Business Economics 8.1 (1996): 59-67.

Cooley, Thomas F., and Vincenzo Quadrini. "Financial markets and firm dynamics." American Economic Review (2001): 1286-1310.

Demirgüç‐Kunt, Asli, and Vojislav Maksimovic. "Law, finance, and firm growth." The Journal of Finance 53.6 (1998): 2107-2137.

Dunne, P., and A. Hughes (1994) ‘Age, Size, Growth and Survival: UK Companies in the 1980’s’, The Journal of Industrial Economics, 42, 115–140.

Dunne, T., M.J. Roberts and L. Samuelson, 1989, The growth and failure of U.S. manufacturing plants, Quarterly Journal of Economics 104, 671-698.

Evans, D.S., 1987a, The relationship between firm growth, size and age: estimates for 100 manufacturing industries, The Journal of Industrial Economics 35, 567-581.

Evans D.S., 1987b, Tests of alternative theories of firm growth, Journal of Political Economy 95, 657-674.

Gibrat, R. (1931). Les inégalités économiques. Recueil Sirey.

Glick, Reuvan, and Kevin Lansing, 2010, ‘‘Global Household Leverage, House Prices, and Consumption,’’ Federal Reserve Bank of San Francisco Economic Letter No 2010-01.

Hall, B.H., 1987, The relationship between firm size and firm growth in the U.S. manufacturing sector, The Journal of Industrial Economics 35, 583-606.

Hart, Peter Edward, and Sigbert Jon Prais. "The analysis of business concentration: a statistical approach." Journal of the Royal Statistical Society. Series A (General) 119.2 (1956): 150-191.

Huynh, Kim P., and Robert J. Petrunia. "Age effects, leverage and firm growth." Journal of Economic Dynamics and Control 34.5 (2010): 1003-1013.

Jovanovic, Boyan. "Selection and Evolution of Industry." Econometrica 50 (1982): 649-70. King, Mervyn, 1994, ‘‘Debt Deflation: Theory and Evidence,’’ European Economic Review, Vol. 38, No. 3–4, pp. 419–55.

Lang, Larry, Eli Ofek, and RenéM Stulz. "Leverage, investment, and firm growth." Journal of financial Economics 40.1 (1996): 3-29.

Leamer, Edward, 2007, ‘‘Housing Is the Business Cycle,’’ NBER Working Paper No. 13428 (Cambridge, Massachusetts, National Bureau of Economic Research).

Levine, Ross, and Sara Zervos. "Stock markets, banks, and economic growth." American economic review (1998): 537-558.

Mansfield, E., 1962, 'Entry, Gibrat's Law, Innovation, and the Growth of Firms', American Economic Review, 52 (December), pp. 1031-105 1.

McConnell, John J., and Henri Servaes. "Equity ownership and the two faces of debt." Journal of Financial Economics 39.1 (1995): 131-157.

Mendoza, E. G. ve M. E. Terrones (2008). “An Anatomy of Credit Booms: Evidence from Macro Aggregates and Micro Data”, Working Paper 14049.

Mian, Atif, and Amir Sufi. "Household Leverage and the Recession of 2007–09." IMF Economic Review 58.1 (2010): 74-117.

Nelson, Richard R., and Winter, Sidney G. An Evolutionary Theory of Economic Change. Cambridge, Mass.: Harvard Univ. Press, 1982.

Schularick, M. ve A. M. Taylor (2012). “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008”, American Economic Review 102(2).